Debtholders Are Left Steamed as Some Cities Forgo Repayment Promises
The housing crisis was fueled by cash-strapped homeowners who walked away from their mortgages. Some analysts and investors now are worried about the same problem happening with debts of cities and towns.
For more than a year, Menasha, Wis., hasn't paid back about $23 million in principal for short-term notes tied to a failed steam plant, even though the deal's offering documents include a statement that the city would use tax revenue to cover any debt payments, if needed.
But that statement "was no guarantee" to repay the debt, says Edward Fuhr, a lawyer for Menasha, a small industrial city that has spent an average of $80,000 a month to fight investor lawsuits in three courts over the notes, which matured in September 2009.
he tangle underscores concern in the municipal-debt world about the longstanding assumption that local governments will do whatever it takes to repay their debts—including raising taxes—because failing to do so would make it more expensive or even impossible to turn to investors for future financing.
Such cases are rare but could increase in number as municipal governments struggle to meet their obligations on projects that have run into trouble. The greatest default risk is in small municipalities with overleveraged projects buffeted by the recession. Those places also might need to access credit markets less in the future than big cities, making it easier to walk away from their debt.
Cost overruns doomed Menasha's steam plant, which was shuttered in the fall of 2009 after the debt more than doubled to about $40 million. In Harrisburg, Pa., an incinerator project has forced the city to weigh a potential bankruptcy filing.
Another trouble spot for investors: Buena Vista, Va., a city of about 6,200 on the edge of the Blue Ridge Mountains that didn't appropriate money in its 2011 budget to make debt payments on $10 million in bonds that financed a municipal golf course, according to Moody's Investors Service.
Moody's downgraded Buena Vista's credit rating in June to junk from "low credit risk," citing "uncertainty about the city's willingness to meet its obligations." The city's lawyer couldn't be reached for comment.
Of 54 defaults on Moody's-rated municipal debts from 1970 to 2009, about 78% were in stand-alone housing and health-care projects. Defaults like the Menasha steam plant are somewhat different because they often are backed and operated by the local municipality....MORE